Dynamic Asset Allocation With Event Risk, Transaction Costs and Predictable Returns

36 Pages Posted: 4 May 2018

Date Written: April 9, 2018

Abstract

We examine the interplay between event risk, transaction costs and predictability on the dynamic asset allocation of an investor with discrete trading opportunities. The model is calibrated to the U.S. stock market and a Gauss-Hermite quadrature approach is used to solve the investor's dynamic optimization problem. Numerical scenarios are examined to show the impact of event risk on asset allocations, hedging demands, no-trading regions, and certainty equivalent returns. It is found that event risk shrinks hedging demand. Neglecting event risk can also lead to sizeable certainty equivalent return losses.

Keywords: dynamic asset allocation, event risk, jumps, transaction costs, return predictability

JEL Classification: G11

Suggested Citation

Simonato, Jean-Guy, Dynamic Asset Allocation With Event Risk, Transaction Costs and Predictable Returns (April 9, 2018). Available at SSRN: https://ssrn.com/abstract=3164908 or http://dx.doi.org/10.2139/ssrn.3164908

Jean-Guy Simonato (Contact Author)

HEC Montréal ( email )

3000, chemin de la Cote-Sainte-Catherine
Service de l'enseignement de la finance
Montreal, Quebec H3T 2A7
Canada
514-340-6807 (Phone)
514-340-5632 (Fax)

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